The Joint Effect of Disaggregated Segment Disclosures and Reporting of Segment Profitability Information on Managers’ Operational Decisions

Sealy, Chezham
Wang, Elaine
Yu, Yao
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Recently, the Financial Accounting Standards Board (FASB) initiated a project that would require companies to disaggregate all reportable operating segments and expand the list of required items to be reported for each segment (FASB 2019b). In this study, we examine how disaggregated segment disclosures and the reporting of segment profitability information jointly affect managers’ operational decisions. We predict and find that more disaggregated (versus aggregated) segment disclosures can increase managers’ concern about segment-level performance, particularly primary segment performance, and cause them to engage in operational distortion that sacrifices overall firm value. Moreover, this negative effect of segment disclosure disaggregation is exacerbated when segment profitability information is reported, because the within-firm segment profitability comparison increases managers’ pressure to report favorable primary segment performance. Our study informs regulators about potential unintended consequences of the proposed standard and provides new insights into managers’ operational decisions that can be influenced by segment reporting.
Manager Decisions, Segment Disclosures, Disaggregation, Benchmark Pressure
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